July 12, 1999
Cover

Net Gains

E-commerce is changing the way that business is conducted worldwide -- but Canadian companies are slow to adapt

BY WARREN CARAGATA

The scene is a picturesque little Italian town featured in an IBM television commercial for electronic commerce. A stuffy-looking American couple stumble across a small shop that looks as ancient as the woman who runs it. "Look, they make olive oil," the tourist lady proclaims. Her tone is clear: this is a quaint and tradition-steeped enterprise. "We have three stores in Ohio," the tourist lady says proudly. The old woman is quick to reply: "Ohio? We sell in Ohio, and California, and Canada, and Argentina." How? Of course. The tourist lady is chastened: "They're on the Internet," she says.

Or, as yet another ad puts it, isn't everybody on the Internet? Not yet, but they're getting there -- fast. At least one person in 49 per cent of Canadian households now has Internet access, at home or work, according to figures from the Toronto office of International Data Corp. (Canada) Ltd. About 10 million Canadians counted themselves Internet users last year -- and projections estimate that will climb to 23.9 million (of a population of about 32.5 million) by 2003. Worldwide, Internet traffic doubles every 100 days. Those soaring numbers have a huge impact on the way consumers shop and businesses function. IDC's forecasts for e-commerce are phenomenal. Revenues in 1998 in Canada: $5.3 billion; five years after that: $80.4 billion. That's a growth rate of 1,416 per cent. Anyone who didn't believe the Web was the next wave of commerce is about to get trampled. This looks like the gold rush on amphetamines.

Business on the Internet started with the purchase of software and computers, but it is quickly becoming the means for many consumers to buy just about anything -- from Beanie Babies on auction sites, to bulky big-ticket items like cars and household appliances. Even flea markets are getting in the game: last week, Halifax-based Salter New Media, an affiliate of the same company that produces the comedy series This Hour Has 22 Minutes, announced that it is expanding its Bargoon.com (www.bargoon.com), an auction and flea-market site already operating in Canada, into the United States. "Anything where information is part of the purchase decision is a candidate for electronic commerce," says David Pecaut, an Iowa native now living in Toronto who heads the worldwide e-commerce practice at U.S.-based Boston Consulting Group. Confounding the skeptics, even clothing is becoming a popular Internet buy, although Paul Walters, Sears Canada Inc.'s chief executive, doubts the day will come when a woman shops online for an evening dress. But otherwise -- just about anything goes.

In 1998, only $688 million of Canadian retail trade -- or less than one per cent of all sales -- was transacted on the Net. But a study conducted by IDC for the Retail Council of Canada and IBM Canada Ltd. predicts that within five years the number will rise to 4.6 per cent. After that, "we really don't know how it's going to turn out," says Joe Greene, director of Internet research at IDC and one of the study's authors. But Greene and others expect the growth rate to quicken as electronic commerce moves into the mainstream. "We're now at the beginning of an e-commerce explosion," says James McQuivey, a senior analyst at Forrester Research in Cambridge, Mass., which is a leader among the firms tracking Internet trends. He believes individual access to the Net is one of the few limits on how far expansion will go.

E-commerce appears to be rebuilding the foundations of modern business. "It's not just a shopping channel," says David Marcus, head of IBM Canada Ltd.'s retail consulting practice. The World Wide Web has created a new breed of businesses, mostly American still, such as Amazon.com Inc., Yahoo! Inc. and E*Trade Group Inc. Established firms are now forced to remake themselves at a frenzied pace to take on new competitors in a phenomenon that Microsoft Corp. chairman Bill Gates calls "punctuated chaos," where change is interrupted only by short periods of stability. David Leslie, the Toronto-based CEO of consulting firm Ernst & Young, says that successful business leaders must understand that old ways of doing things are under constant threat. "People have to be bold," he says. "You have to be prepared to risk your traditional businesses."

The changes are coming in many industries, but a few sectors stand out for the magnitude of the transformation. Canadian retailers are being forced to take to the Net to defend their turf against American players. Canadians weaned on bank machines and debit cards are taking easily to the Web to handle their financial needs, with online stock trading now menacing the traditional brokerage business. In the auto business, consumers are buying cars on the Net, while the industry ponders how to roll custom-made vehicles off assembly lines to fill Web purchase orders. Travel is under siege: agents must get online or risk being pushed aside by cyber-competitors that include Microsoft. In the media business, packaging existing content rather than producing original material is becoming the ticket to success for new competitors like Yahoo! and Canada's Sympatico.

Yet for most Canadian businesses, the question is whether they fully appreciate that there is no more business as usual? The answer appears to be no. "People have not perceived this as the threat it really is," says Pecaut. The Retail Council study released in mid-June bears out Pecaut's view. It shows that only one-quarter of the top Canadian retailers are selling online, compared with half of their U.S. counterparts.

This reluctance to adopt e-commerce has led to the southbound flow of online dollars. The Retail Council survey proves what has long been suspected: Canadians spent $688 million over the Net last year, with 63 per cent of that going to U.S. Web sites. It's not that Canadians were happy about cross-border cyber-shopping -- most said they would have preferred to buy from domestic sites. "But Canadian retailers aren't out there," says IBM's Marcus.

Why the hesitation? Blame it on generally conservative executives who balk at the time and expense involved in opening an online store, and the lack of sizable and immediate profits. But the pace of change, driven by the falling costs of computing power and the rise in Internet use, is so rapid that waiting for the full picture to come into focus may not be an option. "It's just a clear strategy for self-destruction," says Ford of Canada president Bobbie Gaunt, who wants all Ford dealers online by year-end and expresses concern that Canadian business leaders are being too slow to embrace the Net.

E-commerce would not be the first trend Canadian retailers have missed, the Retail Council study notes, citing such issues as Sunday shopping, big-box chains and catalogue shopping. Missing out again could mean more retail debacles like Eaton's. "This should be a wake-up call for Canadian retailers," says Marcus.

Far more Canadians use the Internet, of course, than ever go shopping on it -- only 12 per cent of users made a Web purchase last year. A key issue in holding people back is a fear that credit-card transactions are insecure: 97 per cent of U.S. consumers in a 1998 Ernst & Young study said they weren't buying online because of security concerns. Canadian studies have made similar findings. But as cyber-shoppers get used to the process, fear recedes. Chuck Wilson, vice-president of e-commerce at the Royal Bank of Canada, says consumers should have no worries as long as they are shopping in the secure Web environment now offered by virtually all commerce sites. It is merchants who bear the real security risks -- they have no way of knowing whether cardholders are legitimate. The credit-card industry is getting close to a programming solution, but for the moment banks treat a Web purchase as a "moto" -- a mail-order, telephone order -- where the business bears the risk if the card has been stolen.

Consumer activity on the Web is the most visible part of the electronic commerce juggernaut, but is overshadowed by what businesses are doing with each other as suppliers and buyers. Last year, business-to-business sales generated an impressive $4.6 billion in online sales, up from $1.5 billion the previous year. The federal government is gradually moving its procurement online with a Web site called Merx, which is now handling another $8 billion to $10 billion a year in sales that are not included in the Retail Council estimates. About 35,000 companies use the system, operated by Toronto-based Cebra Inc., to bid on government work.

As in every gold rush, some trails offer more glitter than gilt. Boston Consulting's Pecaut says when people look ahead to the next few years, they overestimate the changes that e-commerce will bring. But looking a decade ahead, he says, they underestimate the transformation -- because it is hard to conceive of change that profound. This is, he says, like the dawn of the automobile age. Few in 1899 could have looked at a car and predicted suburbs. All we know now is that the future is coming faster than we can imagine.